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The firm you work for, ABC Co., is considering the acquisition of a firm in the Czech Republic and would like your opinion on this. It plans to operate the firm for 3 years and then reevaluate the holding.
Free Cash flows are estimated as follows:
Year 1 - 38.63M Czech Koruna (CZK), Year 2 - 44.33 M CZK,
Year 3 - 50.48M CZK
The third year terminal value is estimated at 375M CZK.
The Czech Koruna's exchange rate is assumed to be .038 USD/CZK for each year. ABC Co. uses a WACC of 13 % for its domestic projects. So, the PV of the FCF's for the firm is 363.78 M CZK or $13.82M. The Czeck firm has 1,000,000 shares outstanding and a debt to equity ratio of 1:1. Current market price is 185 CZK per share.
All monetary information (except per share) should be presented in CZK millions (i.e., do not convert to USD).
Should ABC Co. make a deal if its policy is to never exceed a 20% premium in any tender offer? To defend your position, you must prepare and present an Excel template that includes the calculated fair value premium over market.
What changes in the analysis or additional analysis do you suggest before a final decision should be made?
Using the DCF methodology required in question 1, please take one of your suggestions and reevaluate the buy-out. To complete this question, you will have to present a second Excel template that includes your new assumed values and supports your recommendations. Further, please comply with the following:
Assumptions must be reasonable - i.e., don't select arbitrary values. Some discussion should be provided that explains how you arrived at your new assumed values.
Variable changes should be restricted to the discount rate, the FCFs, and/or the terminal value. Please present only one set of assumptions (e.g., do not submit a table that includes multiple values for the same variables.)
To demonstrate that you have successfully prepared the Excel template, no two students may use the same values. To help ensure that your values are unique, please use a minimum of three significant (i.e., non-zero) digits to the right of the decimal point.
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The objective of the problem is to make you evaluate the ABCs investment decision using the present value method and reach a decision in the foreign investment context. To make your task easy the present value calculations are already mentioned and the company policy of not exceeding 20% premium is given to you so that you know the maximum possible price, which will be offered for the company.
There are several assumptions which the problem makes, firstly, the problem assumes that this is a purely investment decision and does not consider other functions like the markets for the company's products, the human resource of the company or the Czech government policies. Second, the company assumes the current exchange rate, what will be the rate after three years? Third the problem mentions a debt-equity ratio of 1:1 a safe ratio. However, why is the proportion of debt lower than the benchmark of 2:1? Is there a problem relating to credit? Fourthly, the current market price of shares is 184 CZK per share. However, the problem omits mentioning ...
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